Grants or Startup Tax Credit : Which one is right for you? Web - - PowerPoint PPT Presentation

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Grants or Startup Tax Credit : Which one is right for you? Web - - PowerPoint PPT Presentation

Nov 13, 2023 305 likes •906 views

Grants or Startup Tax Credit : Which one is right for you? Web ebinar 19 th , 2018 Septem ember er 1 2018 Jacob Setterbo , Ph.D., Director of Grants Jim Foster , J.D., National Tax Director Pres esen entation on O Overview Overview

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SLIDE 1

Grants or Startup Tax Credit: Which one is right for you?

Web ebinar Septem ember er 1 19th, 2018 2018 Jacob Setterbo, Ph.D., Director of Grants Jim Foster, J.D., National Tax Director

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SLIDE 2

Pres esen entation

  • n O

Overview

  • Overview of Grants
  • Compare: Grants vs. R&D Tax Credits
  • Overview of R&D Tax Credit
  • Details on Startup R&D Tax Credit
  • Q&A
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SLIDE 3

Ex Example Taxable I Income vs. Time

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SLIDE 4

Why Gr y Gran ants? s?

Grants

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SLIDE 5

Why Gr y Gran ants? s?

Top 4 Reasons:

  • 1. Not a loan –

no repayment

  • 2. Non-dilutive –

no equity forfeiture

  • 3. No intellectual property (IP) forfeiture
  • 4. Provides recognition, verification, and visibility
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SLIDE 6

Which Grants ts?

  • 10s to 100s depending
  • n your topic
  • Choose your battles

wisely…

Tenured Professor Entrepreneur

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SLIDE 7

#1

Professors/ Universities Small Businesses

Funds research and development (R&D) that has the potential for commercialization!

Which Grants ts?

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SLIDE 8

Figure: SBIR/STTR Budgets by Agency (FY13) - ~$2.3B Total

  • Agencies
  • 1. Department of Agriculture
  • 2. Department of Commerce

– National Institute of Standards and Technology – National Oceanic and Atmospheric Administration

  • 3. Department of Defense
  • 4. Department of Education
  • 5. Department of Energy
  • 6. Department of Health and Human Services

– National Institutes of Health

  • 7. Department of Homeland Security
  • 8. Department of Transportation
  • 9. Environmental Protection Agency
  • 10. National Aeronautics and Space Administration
  • 11. National Science Foundation

SBIR/ R/ST STTR – Par artici cipating A Agenci cies

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SLIDE 9
  • For profit, located in US
  • <500 employees
  • Ownership:
  • >50% by U.S. individuals
  • National Institutes of

Health (NIH) SBIRs allow:

  • >50% owned by multiple VC

firms, etc.

SBIR/ R/ST STTR – Eligibility

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SLIDE 10
  • SBIR
  • ≥*67% through small business
  • Principal Investigator (PI)

employed 50% at small business

  • STTR (partnership)
  • ≥40% through small business
  • Requires ≥30% through single

university/institution

  • NIH allows PI to be employed

at the university

*NIH allows as low as 50% through small business

SBIR/ R/ST STTR – Eligibility – Faci ciliti ties/Team

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SLIDE 11

SBIR/ R/STTR – Revi view P Proces

  • cess &

& Succ ccess R Rates ( (NIH)

  • Most reviewers are

professors

  • NIH SBIR/STTR:
  • 15-20% get funded
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SLIDE 12

SBIR/ R/STTR – Revi view P Proces

  • cess &

& Succ ccess R Rates ( (NIH)

  • Application score is based on 5 criteria:

1. Significance (importance/impact) 2. Investigators (PhDs/MDs/patents/experience) 3. Innovation (differentiation/new-to-world) 4. Approach (logical/backed by science) 5. Environment (company & collab. facilities)

  • Before applying:
  • Is your Project/Team among the best?
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SLIDE 13

SBIR/ R/ST STTR – Award I Information

  • Phases
  • Phase I: feasibility
  • Phase II: continuation
  • Fast Track: Phase I & II
  • (Phase III: on your own)

Phase I $150K - $225K 1 year Phase II $1M - $1.5M 2 years Phase III … Fast Track

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SLIDE 14

SBIR/ R/ST STTR – Timeline t to Fu Funding

  • April 5th Deadline (NIH) – EXAMPLE 1
  • First Submission
  • ~6-8 months from submission to award

Submit

2 mos.

Jan 2 3 4 5 6 7 8 9 10 11 12 Jan 2 3 4 5 6 7 8 9 10 11 12

Scientific Review

3-4 mos.

Advisory Council

2-4 mos.

Begin R&D PROJECT – Phase I

12 mos.

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SLIDE 15

SBIR/ R/ST STTR – Timeline t to Fu Funding

  • April 5th Deadline (NIH) – EXAMPLE 2
  • Resubmission
  • ~12-14 months from submission to award

Submit

2 mos.

Jan 2 3 4 5 6 7 8 9 10 11 12 Jan 2 3 4 5 6 7 8 9 10 11 12

Scientific Review

3-4 mos.

Submit

2 mos.

Scientific Review

3-4 mos.

Advisory Council

2-4 mos.

Begin R&D Project – Phase I

12 mos.

Jan 2 3 4

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SLIDE 16
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SLIDE 17

Why R&D T D Tax Credi dits?

Grants R&D Tax Credits (2015) R&D Tax Credits (2016+)

TAKE-AWAY:

You no longer need taxable income!

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SLIDE 18

Why R&D T D Tax Credi dits?

Top 3 Reasons:

  • 1. Not a loan –

no repayment

  • 2. Non-dilutive –

no equity forfeiture

  • 3. No intellectual property (IP) forfeiture
  • 4. Provides recognition, verification, and visibility
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SLIDE 19

R&D D Tax Credits – Eligibility & Succe uccess R s Rates

  • Eligibility determined by:
  • Gross Receipts
  • Qualifying Research

Expenditures (QREs)

  • Unlike SBIR/STTR projects,

your R&D projects could be:

  • From any technology sector
  • Boring / incremental
  • Success Rates:
  • Near 100% IF you follow IRS

rules!

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SLIDE 20

R&D D Tax Credits – Timeline to Fun unding

  • March 15th Deadline – EXAMPLE 1
  • Standard R&D Tax Credit [companies with taxable income]

Jan 2 3 4 5 6 7 8 9 10 11 12 Jan 2 3 4 5 6 7 8 9 10 11 12

Qualifying R&D EXPENSES

12 mos.

File Taxes Credit provides immediate savings.

2018 2017

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SLIDE 21

R&D D Tax Credits – Timeline to Fun unding

  • March 15th Deadline – EXAMPLE 2
  • Payroll (Startup) R&D Tax Credit [no taxable income required]

Jan 2 3 4 5 6 7 8 9 10 11 12 Jan 2 3 4 5 6 7 8 9 10 11 12

Qualifying R&D EXPENSES

12 mos.

File Taxes Credit Offsets Payroll Taxes

Offset begins the quarter after filing

Jan 2 3 4

2018 2017 2019

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SLIDE 22

GRAN ANTS v

  • vs. R&D

D Tax Credits

Grants R&D Tax Credits

Success Rate 15-20% (judged by professors) Near 100% (judged by IRS rules) Forward or Backward-Looking? Timeline to Money/Credit Amount

You should do both if possible!

6-10 months from time of submission 0-3 months from time of filing $225K for Phase I $1.5M for Phase II 8-12% of Qualifying R&D Forward: Future projects Backward: Past projects

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SLIDE 23

Pres esen entation

  • n O

Overview

  • Overview of Grants
  • Compare: Grants vs. R&D Tax Credits
  • Overview of R&D Tax Credit
  • Details on Startup R&D Tax Credit
  • Q&A
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SLIDE 24

What i is the R&D Tax Credit?

  • GOAL:
  • Keep innovation and creativity in the U.S.
  • Encourage economic growth
  • BENEFIT:
  • Tax credit for companies that perform R&D in the U.S.
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History o

  • f t

the R&D D Tax Credit

  • TIMELINE:

1980

  • 1985
  • 1990
  • 1995
  • 2000
  • 2005
  • 2010
  • 2015
  • …

First adoption of R&D tax credit

(The Economic Recovery Tax Act of 1981)

Several expirations of credit, then retroactive extensions… Small to mid-size companies made eligible to take the R&D (wage-based) tax credits

3 HISTORIC CHANGES!

[Protecting Americans from Tax Hikes (PATH) Act of 2015]

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History o

  • f t

the R&D D Tax Credit

  • PATH Act of 2015
  • 1. Made R&D Tax Credit PERMANENT for the

first time

  • 2. Small Businesses can claim the credit

against the Alternative Minimum Tax (AMT)

  • 3. Startups can claim up to $250K of the

credit against the company's payroll tax

1980

  • 1985
  • 1990
  • 1995
  • 2000
  • 2005
  • 2010
  • 2015
  • …

3 HISTORIC CHANGES!

[Protecting Americans from Tax Hikes (PATH) Act of 2015]

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SLIDE 27

1) 1) R&D Tax Credit is now PERM RMANEN ENT

  • Businesses can now

budget for tax credits in confidence

  • Credit will not expire

in the middle of the fiscal year

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Scenario 1: TMT>RTL Scenario 2: TMT<RTL

2) Small B Businesses can claim the credit against AMT 2015

Alternative Minimum Tax OVERVIEW

  • RTL=Regular Tax Liability
  • TMT=Tentative Minimum Tax
  • AMT=Alternative Minimum Tax

R&D Tax Credit

  • Credit can offset the spread

(spread = RTL-TMT)

RTL RTL

AMT

TMT R&D credit

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SLIDE 29

Scenario 1: TMT>RTL Scenario 2: TMT<RTL

2) Small B Businesses can claim the credit against AMT 2016 (PATH Act Changes)

Alternative Minimum Tax OVERVIEW

  • RTL=Regular Tax Liability
  • TMT=Tentative Minimum Tax
  • (Set to $0 for credit utilization)
  • AMT=Alternative Minimum Tax

R&D Tax Credit

  • Eligibility: Average annual gross

receipts must be < $50M

  • Credit can offset any taxes paid!

RTL RTL

AMT

R&D credit R&D credit TMT

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SLIDE 30

2) Small B Businesses can claim the credit against AMT

CHANGES explained using TI vs. Time Graph

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2015/old 2) Small B Businesses can claim the credit against AMT

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2016/new 2) Small B Businesses can claim the credit against AMT

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SLIDE 33

2016/new 3) S Sta tartups can claim the credit against payroll tax

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3) S Sta tartups can claim the credit against payroll tax

  • PATH Act of 2015 [no taxable income required!]
  • For the 1st time, R&D tax credit can offset payroll taxes
  • Eligibility (more restrictions than AMT offset):
  • Current year (e.g., 2017) gross receipts must be < $5M
  • No gross receipts before 5-taxable-year period ending with

current year (e.g., no GRs prior to 2013)

  • Benefits
  • Can offset payroll taxes quarterly after filing a return
  • Benefit capped at $250K/year per company
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SLIDE 35

3) S Sta tartups can claim the credit against payroll tax

FORM 6765

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SLIDE 36

3) S Sta tartups can claim the credit against payroll tax

FORM 941 FORM 8974

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SLIDE 37

What q t qualifi fies as R&D?

Tax Definition (“4-Part Test”)

1. New or Improved Business Component

  • Product
  • Process
  • Software (Internal or External)
  • Technique
  • Formula
  • Invention

2. Technical Uncertainty 3. Process of Experimentation 4. Technological in Nature

Traditional Definition

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SLIDE 38

Qualified R&D Ex Expenses (QRE QREs)

  • If your project passes the 4-Part Test,

you can qualify Three Expense Categories:

1. Wages 2. Supplies 3. 65% of Contract Research

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SLIDE 39

Qualified R&D Ex Expenses (QRE QREs)

Three Expense Categories:

1. Wages

  • Includes:
  • Form W-2
  • Partnership Earnings subject to Self

Employment Tax

  • Schedule C
  • Bonuses paid to employees
  • Excludes:
  • 401(k) & fringe benefits
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SLIDE 40

Qualified R&D Ex Expenses (QRE QREs)

Three Expense Categories:

2. Supplies

  • Items intended for use in R&D process
  • Any tangible property used in the conduct of qualified research
  • ther than: land, improvements to land, or property subject to

depreciation

  • E.g.: lab animals, reagents, drugs, supply costs for prototypes, etc.
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SLIDE 41

Qualified R&D Ex Expenses (QRE QREs)

Three Expense Categories:

3. 65% of Contract Research

  • Can include fees paid to:
  • Non-employees
  • Outside consultants/engineers/software developers
  • Contract Research Organizations (CROs)
  • Qualification depends on the contract

(e.g., applicant must bear economic risk & retain substantial rights)

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SLIDE 42

Tax Cre redit Amount

  • Benefit varies by calculation method used
  • Tax Credit = 8-12% of QREs:
  • 10% with Regular Credit Method
  • 8-12% with Simplified Credit Method
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SLIDE 43

Other R&D D Considerations

  • Carryforward of credit
  • R&D Tax Credits – 20 years
  • Payroll (Startup) Tax Credit – indefinitely
  • Net Operating Losses (NOLs) – 20 years
  • This may offset the need for R&D tax credit

NOL

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SLIDE 44

Life science examples (over-simplified):

  • Company qualified?
  • What proportion is QREs?
  • Approximate credit?

Startup Examples

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SLIDE 45

Exa xample 1 1

  • Preclinical Stage (All R&D, All the Time)
  • Founded: 2013
  • Payroll and supplies: $242K + $8K
  • Gross receipts: None
  • All payroll ($242K) qualified:
  • CEO: leads the R&D experiments
  • Laboratory technicians assist with experiments
  • Supplies ($8K) are qualified:
  • Mice, rats, laboratory consumables, etc.
  • FICA taxes (currently 6.2%) = $15,004
  • R&D credit estimate (using 10%) = $25,000
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SLIDE 46

Exa xample 1 1

  • Preclinical Stage (All R&D, All the Time)
  • Founded: 2013
  • Payroll and supplies: $242K + $8K
  • Gross receipts: None
  • All payroll ($242K) qualified:
  • CEO: leads the R&D experiments
  • Laboratory technicians assist with experiments
  • Supplies ($8K) are qualified:
  • Mice, rats, laboratory consumables, etc.
  • FICA taxes (currently 6.2%) = $15,004
  • R&D credit estimate (using 10%) = $25,000
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SLIDE 47

Exa xample 2 2

  • Digital Health (R&D but Faster-Moving)
  • Founded: 2014
  • Payroll: $1M
  • Gross receipts:
  • $500K in 2015 from app sales
  • $5.5M in 2016
  • $4.2M in 2017
  • Only 75% ($750K) of payroll qualified:
  • Most of the programmers are actively working on R&D
  • But: CEO time fundraising and marketing is not qualified
  • Administrative assistant also does not assist with R&D
  • FICA taxes (currently 6.2%) = $62,000
  • R&D credit estimate (using 10%): $75,000
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SLIDE 48

Exa xample 2 2

  • Digital Health (R&D but Faster-Moving)
  • Founded: 2014
  • Payroll: $1M
  • Gross receipts:
  • $500K in 2015 from app sales
  • $5.5M in 2016
  • $4.2M in 2017
  • Only 75% ($750K) of payroll qualified:
  • Most of the programmers are actively working on R&D
  • But: CEO time fundraising and marketing is not qualified
  • Administrative assistant also does not assist with R&D
  • FICA taxes (currently 6.2%) = $62,000
  • R&D credit estimate (using 10%): $75,000
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SLIDE 49

Exa xample 3 3

  • Clinical (R&D and Approaching Commercialization)
  • Founded: 2009
  • Payroll: $1M
  • Outsourced/contract costs: $500K
  • Gross receipts: None
  • Only 70% ($700K) of payroll qualified
  • R&D for 1st and 2nd pipeline drugs qualifies
  • Sales and business development payroll does not qualify
  • Only 50% ($250K) of contract costs is R&D, and only 65% of that qualifies ($162.5K):
  • Hourly contractors performing R&D qualify
  • Lawyer and consultant costs for IP and regulatory does not qualify
  • FICA taxes (currently 6.2%) = $62,000
  • R&D credit estimate (using 10%) =

$70,000 + $16,250 = $86,250

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SLIDE 50

Exa xample 3 3

  • Clinical (R&D and Approaching Commercialization)
  • Founded: 2009
  • Payroll: $1M
  • Outsourced/contract costs: $500K
  • Gross receipts: None
  • Only 70% ($700K) of payroll qualified
  • R&D for 1st and 2nd pipeline drugs qualifies
  • Sales and business development payroll does not qualify
  • Only 50% ($250K) of contract costs is R&D, and only 65% of that qualifies ($162.5K):
  • Hourly contractors performing R&D qualify
  • Lawyer and consultant costs for IP and regulatory does not qualify
  • FICA taxes (currently 6.2%) = $62,000
  • R&D credit estimate (using 10%) =

$70,000 + $16,250 = $86,250

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SLIDE 51

Exa xample 3 3-b

  • Clinical (R&D and Approaching Commercialization)
  • Founded: 2009
  • Payroll: $1M
  • Outsourced/contract costs: $500K
  • Gross receipts:
  • $150K in 2010
  • $0 in 2011-2016
  • COMPANY NOT QUALIFIED
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SLIDE 52

Exa xample 3 3-b

  • Clinical (R&D and Approaching Commercialization)
  • Founded: 2009
  • Payroll: $1M
  • Outsourced/contract costs: $500K
  • Gross receipts:
  • $150K in 2010
  • $0 in 2011-2016
  • COMPANY NOT QUALIFIED
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SLIDE 53

Exa xample 4 4

  • SBIR-Heavy (Some Payroll is Federally Funded)
  • Founded: 2015
  • Payroll: $500K
  • Only 60% ($300K) of payroll qualified:
  • 100% of company’s payroll is committed to R&D
  • But: 40% of payroll ($200K) is funded by SBIR and is not qualified:
  • Projects funded by grants are not allowed (per IRC § 41(d)(4)(H))
  • FICA taxes (currently 6.2%) = $31,000
  • R&D credit estimate (using 10%): $30,000
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SLIDE 54

Exa xample 4 4

  • SBIR-Heavy (Some Payroll is Federally Funded)
  • Founded: 2015
  • Payroll: $500K
  • Only 60% ($300K) of payroll qualified:
  • 100% of company’s payroll is committed to R&D
  • But: 40% of payroll ($200K) is funded by SBIR and is not qualified:
  • Projects funded by grants are not allowed (per IRC § 41(d)(4)(H))
  • FICA taxes (currently 6.2%) = $31,000
  • R&D credit estimate (using 10%): $30,000
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SLIDE 55

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SLIDE 56
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SLIDE 57
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SLIDE 58

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SLIDE 59

QUESTIONS?

HIREtech

200 Westlake Park Blvd. Suite 501 Houston, TX 77079

281-558-7100 info@hiretech.com www.hiretech.com Jacob: ext. 151, jsetterbo@hiretech.com Jim: ext. 112, jfoster@hiretech.com

RESOURCES

  • Internal Revenue Code section 41 (IRC § 41)
  • PATH Act Bill, Division Q, Part 3, Section 121